WHY so narrow?

Remapping Debate begins a four-part series on the consequences of how economics is and is not taught to undergraduates in the United States. One school of thought — neoclassical ecomomics — has continued its long dominance, a status quo unchanged by its failure to predict or account for the current financial crisis. Here in Part 1 of the series, we look at some basic precepts of neoclassical economics, the divergent perspectives that are ignored, and the charge that the current system fails to foster critical thinking in economics students.

In Part 2 of the series, also published today, we examine the way that neoclassical economics presents itself as a neutral and fact-based discipline, despite ample evidence that it is committed to promoting a specific set of values.

In Part 3, we will look closely at the curriculum that exists at most schools; the wide-ranging impacts on students (including who is attracted to and repelled by the field in terms ranging from deciding to take introductory courses, to majoring as an undergraduate, to going on to graduate work in the field); and at what would be involved in adopting more pluralistic curricula.

Finally, in Part 4, we will investigate the obstacles that stand in the way of changing how economics is taught to undergraduates, and ask supporters of the status quo to explain why they believe that both students and society at large would not benefit from a more open, inclusive curriculum.

— Editor

For U.S. universities, a failing grade in economics

Feb. 8, 2012 — In early November of last year, several dozen students walked out of an introductory microeconomics course at Harvard University taught by N. Gregory Mankiw, a former economic adviser to President George W. Bush and a current advisor to Republican Presidential candidate Mitt Romney. In an open letter to the professor, whose Principles of Economics is the most widely used economics textbook in the country, the students wrote that they were walking out “in order to express [their] discontent with the bias inherent in this introductory economics course.”

“We were getting a very narrow, one-sided view of economics,” said Rachel Sandalow-Ash, a freshman at Harvard who helped to organize the walkout.

That Harvard students — like their counterparts at virtually every other college and university in the U.S. — study almost exclusively “mainstream” or “neoclassical” economics may seem especially surprising in light of a Great Recession that was neither predicted nor accounted for by neoclassical models, a downturn that many critics say was an outgrowth of the U.S. having pursued the policy prescriptions of neoclassical economists so religiously.

“The possibility that a crisis might occur is just outside of the neoclassical framework, so of course they were singularly unequipped to handle it when it did” said David Ruccio, a professor of economics at the University of Notre Dame. “The possibility, or even the inevitability, of crisis is far more central to other schools of thought. If we want students to have a understanding of what has actually happened, they need to be exposed to that.”

But the longstanding dominance of neoclassical economics is especially entrenched in the academy. Most students are rarely, if ever, given an opportunity to study any of a number of other perspectives — such as post-Keynesian, behavioral, Marxian, institutionalist, feminist, or ecological economics — each of which presents a different picture of society. Without a more diverse education, many economists and educators say, students are not encouraged to think critically about, or question the assumptions underlying, what they are learning. Even more disturbingly, students are effectively encouraged to internalize a narrow set of values and principles that have been sold to them as being purely factual or “neutral,” not recognizing that they have been presented with a limited perspective on how the world operates.

“These students are adults,” said Frederic Lee, a professor of economics at the University of Missouri-Kansas City. “They can fight wars for us, have children, vote, but they’re not allowed to be introduced to alternative viewpoints.”

According to Lee, the narrowness of economics education can have profound implications, for both students and society at large.

Sandalow-Ash agreed. Education should not been seen “only as a means to an economic end, but as a means to a political end,” she said. “We’re not just training workers but also citizens, and we want to teach students to criticize the institutions around them,” she added, saying that doing so is the way to ensure that “democracy works.”

A narrow education

Prime among the fundamental principles and assumptions of neoclassical economics is the premise of Homo Economicus, or “rational economic man.” Students are taught that human beings will always act “rationally” to pursue their own interests. Consumers will always try to maximize their “utility” — or satisfaction — while businesses will always seek to maximize their profits.

Neoclassical economics also places a heavy emphasis on markets as representing the best way to organize economic activity. In models of well-functioning markets, all the participants have equivalent access to the information needed make informed decisions in order to pursue their own self-interest, or “perfect information.” (See box below.)

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Perfect information? Perfect competition?

Neoclassical economics proceeds on the assumption that, in most markets, all participants will have full and equal information. As a result, consumers are said to be able to make the best possible decisions about what they are buying and producers who make the best products will therefore be rewarded. The validity of the assumption and the predicted results have come under a barrage of criticism from many heterodox schools of thought.

In connection with health care, for example, different players know more about different elements of information (and can exert varying levels of power). Patients know more about their actual health than do insurance companies, but the insurance providers know more about costs. Physicians tend to have most information about treatment options appropriate for a particular patient.

“If you take the time to think about it, it becomes clear that we’re actually a very information poor society,” said Robert Prasch of Middlebury. “People make economic decisions everyday without knowing very much. We buy computers and cars without knowing anything about how they work or how they were made. How often do we know when the business that makes your car is polluting a river? If you’re renting an apartment, how much do you actually know about the property and its history?”

Similarly, the concept of perfect competition, which depends on perfect information, has also been heavily criticized for ignoring the role that power plays in a market. Perfect competition assumes that all producers have no power — and, thus, equal power — to influence the price at which goods are sold to consumers. According to David Ruccio of Notre Dame, some schools of economic thought reject the concept of perfect competition as being inapplicable to nearly every market.

“It’s a fantasy,” he said. “Most markets you can think of don’t follow those rules. You might get close to perfect competition if the market is for mom-and-pop grocery stores and there are a lot of them and they’re all very small. But we live in a world of gigantic national and multinational corporations that have a tremendous amount of power to set prices above what the market would otherwise bear.”

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Another fundamental precept of neoclassical economics is that markets tend naturally to “equilibrium,” meaning that supply will equal demand unless there is an outside disruption. Markets are assumed to be a preferable way of organizing economic activity because they are said to allocate resources efficiently, which in turn, neoclassicists say, makes economic growth possible.

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A HOMOGENIZED CURRICULUM

The curricular structure and major requirements in economics departments in the United States is strikingly similar across colleges and universities. In their first year, students are generally required to take introductory courses in microeconomics and macroeconomics, which are sometimes substituted for with a single-semester “principles” course. Majors are encouraged to take either introductory calculus or introductory statistics or both in their first year.

In the second year, majors are generally required to take intermediate microeconomics and macroeconomics courses and a third course called “econometrics,” as well as more advanced math courses such as linear algebra. The introductory and intermediate microeconomics and macroeconomics courses plus econometrics are often referred to as the “core curriculum.”

In their third and fourth years, majors are given more flexibility to choose electives or “field” courses, such as finance, labor economics, international trade or monetary theory, which are generally taught from a neoclassical perspective. Some schools may offer electives on the history of economic thought or political economy, but these courses are rarely required. For students wishing to go on to graduate school in economics, substantially more mathematics courses are usually recommended, such as differential equations, game theory, and advanced geometry.

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Other schools of thought begin with different assumptions and draw different conclusions. These various perspectives constitute what is often called “heterodox” economics. Some, like Marxian economics, predate neoclassical economics, while others, like ecological economics, have come about relatively recently, partly to fill perceived gaps in neoclassical theory.

But neoclassical economic theory remains by far the dominant paradigm in the discipline as a whole, and that dominance is even more concentrated at the undergraduate level. More than half of undergraduate students will take at least one class in economics during their time in college. In the 2008-2009 school year, over 26,000 students were awarded a bachelor’s degree in the field. But regardless of which of the approximately 3,000 economics departments they study in, the curriculum and course content is likely to be remarkably similar.

That is because over the last several decades a homogenized model of an undergraduate economics curriculum has proliferated in the United States and, to a slightly lesser degree, abroad (see sidebar). There remain a handful of schools in the country that explicitly endeavor to expose students to other perspectives and give them access to the tools that they provide, but these programs are becoming increasingly scarce.

“If you want to learn about Marxism, or feminist economics, or institutionalism, you need to go to study at one of these dozen or so schools,” said Jack Reardon, professor of economics at Hamline University and the editor in chief of the International Journal of Pluralism and Economics Education.

Robert Prasch, an economics professor at Middlebury College, explained that while other university departments often focus on a dominant school of thought, economics is unique among disciplines in the intensity of its reluctance to offer students any exposure to alternative perspectives. “There’s a sense in most departments [other than economics] that they have to provide a portfolio of outlooks and attitudes,” he said. “If you had an English department without any feminist content, they’d say, ‘We have to go hire somebody.’ Or if a history department didn’t have someone teaching post-colonial studies or a psychology department didn’t teach behaviorism, they’d say, ‘Wow, we need to fix that.’”

Critical thinking

According to many heterodox economists, in order to encourage students to think critically, it is necessary to offer them a variety of perspectives and theoretical frameworks.

“Students need to be taught that whenever they’re looking at the world, in any discipline, they’re looking through a particular pair of glasses,” said Steve Cohn, a professor economics at Knox College. “They’re generalizing and making assumptions. The danger is when you don’t realize what assumptions you’re making.”

“Students are almost never given an opportunity to question the assumptions that are presented to them,” said Neva Goodwin of Tufts University. “They are just expected to accept them.”

Advocates of including multiple perspectives in economics education, who sometimes call themselves “pluralists,” believe that providing students with alternate perspectives makes it easier for them to recognize the assumptions being made in each case. Most advocates for pluralism in economics education believe that neoclassical economics is useful in many contexts and does present a meaningful analysis of the economy. They do not argue that it should not be taught, but that it should be presented as one perspective among many and that students should be allowed to judge for themselves the relevance of a particular model.

Two essential elements of critical thinking, many say, are, first, being able to identify the fact that a decision to select one of many possibilities is called for, and, second, trying to arrive at that decision in the most informed way possible. While many students in economics may learn to think logically or analytically, Cohn said, they are rarely encouraged to think critically in their economics courses, because the assumptions of neoclassical economics are not presented as assumptions, but as facts. This arises from the common presentation of economics as a hard science, like physics, as opposed to a social science, like sociology.

One of the first things students learn from Mankiw’s textbook, for example, is that economics is based on the “scientific method.” While Mankiw briefly addresses the role of assumptions in economic thinking, he defends that use by comparing them explicitly to the assumptions made by physicists and biologists.

“Students are almost never given an opportunity to question the assumptions that are presented to them,” said Neva Goodwin, co-director of the Global Development and Environment Institute at Tufts University. “They are just expected to accept them.” (See box below.)

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The myth of «rational economic man»

To illustrate the problem, Goodwin used the example of Homo Economicus, which assumes that the pursuit of self-interest is a fundamental part of human nature. “What about students who come in believing strongly in altruism?” she asked “Wouldn’t students want the opportunity to consider the possibility that people make choices for a lot of different reasons?”

“You are told that this is something universal, that it applies to all cultures in all of history, that this would apply to a Cro-Magnon community,” said Frederic Lee of the University of Missouri-Kansas City. “But another perspective would ask, ‘How distinctive is this to capitalism as a specific social system? How does decision making change in other kinds of systems?”

And Robert Prasch, a professor of economics at Middlebury College, added that consumer identity is also not accounted for by the concept of Rational Economic Man: “This model does not fully explain why a biker-guy wouldn’t buy a Honda motorcycle. We know it’s because he wants a Harley. So, identity affects consumption. When you strip away all the messiness of identity, you have individual agents who are taking care of themselves, and that’s probably not a description of humanity that students would recognize if they were encouraged to think about it.”

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According to Ruccio, it is only since World War II that students have been able to graduate with a degree in economics without being exposed to any alternate perspectives. “You used to get some of the more critical perspectives in a required political economy course, or a history of economic thought course, and there would have probably been some electives on Marxism or institutionalism” he said. “Those courses have mostly gone away.” (See box below.)

“Presenting an entirely mainstream perspective and not teaching economics as the contested discipline it is, is fundamentally dishonest,” said Geoffrey Schneider of Bucknell University.

Geoffrey Schneider, professor of economics and the director of the Teaching and Learning Center at Bucknell University, believes that economics professors have a responsibility to be straightforward with students about the limitations of every economic theory, including neoclassical economics. “Presenting an entirely mainstream perspective and not teaching economics as the contested discipline it is, is fundamentally dishonest,” he said.

But he also believes that students are missing out under this model of teaching: “Students lose the ability to look at the menu of excellent economic ideas out there and to choose the ones that you find the most meaningful. They lose the ability to analyze the real world.”

And according to Martha Starr, professor of economics at American University, if they are not exposed to alternate viewpoints and encouraged to think critically about them, students are missing the opportunity to develop a skill that will serve them, and the rest of society, later on in their lives.

“Teaching students to think critically is really a crucial input to a vibrant democracy because it opens people eyes,” she said. “It allows them to evaluate things that are going on in the economy and form a [sound] opinion about them. It teaches them to recognize the reasoning around somebody’s argument.

“Those sorts of skills are really what students carry with them out of the classroom,” she said. “They’ll have that long after they’ve forgotten what’s in the numerator and what’s in the denominator of the consumer price index.”

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An ahistorical field?

Until the 1980s, undergraduate students in economics were generally required to take a course in economic history or the history of economic thought, or both. Over the last twenty years, however, those requirements have been dropped from the curriculum in nearly all undergraduate programs, and even many graduate programs do not require them.

This ahistorical view of economics, according to David Ruccio of Notre Dame, deprives students of fundamental knowledge about the field they are studying and how it has developed. “The implication for students is that what exists now has always existed and will always exist,” he said. “It allows for the impression that there is only one perspective on economics and ignores the multiplicity of perspectives that have existed and exist today.”

Julie Nelson, chair of the economics department at the University of Massachusetts Boston, agreed. “Not having those courses removes the context from the theories and makes them seem like they’re divinely ordained,” she said. “There’s no sense that economics is created by people.”

According to Frederic Lee of the University of Missouri-Kansas City, “if you were actually teaching them about the economy, you might have to talk about the rise of capitalism and the industrial revolution,” he said. “You’d need to talk about American history and the plantation economy and the attack on workers in the 1880s and the Great Depression and the military-industrial complex and the Cold War. These are just some examples to illustrate that without the history we have no place to understand what we mean by capitalism, which is essentially what they’re studying.”

‘Greece 2: Revenge!’ – the plot thickens

Now that “Greece”, this season’s big heist movie, is in the can and on the way to the distributor, the producers are sitting around the pool on the exclusive French Caribbean island of St. Barthélemy, working on the sequel, which starts shooting this summer.

As usual, the problem is how to get the audience back for more of the same: meetings convening and breaking up, riots, opposing talking heads, stock shots of the Parthenon. The answer, I believe, is to leak out that the franchise is still fresh, with great plot twists. Also, several lead characters (civil service unions, state enterprises, and pensioners) from “Greece” face horrible fates in the sequel, including slow starvation.

The key to understanding the story arc of the sequel is the one real success of the negotiators for the private sector lenders to Greece: getting pari passu (equal status) treatment for the payments on their new paper with that held by the European Financial Stability Facility, the official lender of the euro group. The term of art is “the escrow account”.

When, as is likely, the Greek government fails the first major test of its commitments under the restructuring deal, the bondholders and EFSF can be paid, out of the same escrow account, by the same fiscal agent, even as cash for the state is cut.

This is what I’ve heard about the current screenplay for “Greece 2: Revenge!”: fast forward past the close of the current deal, to the setting of the date for Greece’s next parliamentary elections. There was hope among some of the current cabinet members, especially the Pasok (socialist party) people, that those could be put off till next year, perhaps even up to the final deadline of next October. Now that doesn’t look as likely, so let’s say that we get elections by late April, after the signatures on the papers have dried.

Here’s a plot twist: key decisionmakers at the multilateral lenders, leading core Europe politicians, and even bankers, now want the Greek public to elect a rabidly anti-“German”, anti-troika coalition government. Ideally, rabidly leftwing, but even a rabidly nationalist anti-troika coalition will do. That would accomplish two goals of the internationals: forcing a break-up of the ossified Greek parties and their “clients”, and manoeuvring the left and nationalists to take the blame for the post-hard-default cuts.

While the Greek state has to meet specific monthly performance criteria, starting next month, the first really significant review is carried out by the troika, in particular an International Monetary Fund team, in June. No one doubts there will be significant “slippage” in meeting fiscal targets and carrying out structural reforms. That will be reported no later than July.

Nothing surprising so far. The markets have been conditioned to expect that Greek non-compliance will be answered by a wagging finger and another wire transfer. In the script I’ve seen, that doesn’t happen this time. Instead, the new Greek government will be told to get back in compliance with budgets and reforms, on a schedule that even a Nordic country couldn’t meet.

The script says those demands are met, of course, with fist-shaking defiance by the Greeks. This time, though, the troika cuts funding for the Greek state, and continues to pay the debt service into the escrow account. In particular, the September and March interest payments for the new private sector Greek bonds are covered. Since we are now in high summer, there isn’t an immediate shortage of euros for the country, as the tourists are spending their convertible currency. But capital controls, ready for the Greek clearing and settlement system since last September, are imposed. Greek deposits are fenced in.

The Greek government would not meet all its domestic obligations, such as supplemental pensions and much of its civil service pay and benefits. The shortfalls are covered by un-expatriatable deposits or scrip. Foreigners are blamed.

In the meantime, the eurosystem central banks would have put all the software and procedures in place for intra-euro area capital controls. Just temporary controls justified by public policy, public security and prudential supervision.

The scrip issued by the Greek state piles up, and trades around. A market price is established for it, say around 50 or 60 cents on the euro. People in the tourism and export sectors gain at the expense of state employees, beneficiaries, and domestic creditors. The trade and government primary deficits close, at the expense of living standards.

After months, or even a year of this bread and water diet, the Greek public and political leaders come around to the idea of getting back on track with the performance criteria. By then, they have decided whether they want to drachma-tise, and inflate away the primary budget deficit, or formally exchange the scrip for its deflated value in euros.

Robert Brenner: A Marxist explanation for the current capitalist economic crisis

Robert Brenner.

Marxist economist Robert Brenner was interviewed by Seongjin Jeong for Hankyoreh, one of South Korea’s leading daily newspapers. The interview was published on January 22, 2009.

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Seongjin Jeong:Most media and analysts label the current crisis as a «financial crisis». Do you agree with this characterisation?

Robert Brenner: It’s understandable that analysts of the crisis have made the meltdown in banking and the securities markets their point of departure. But the difficulty is that they have not gone any deeper. From US Treasury Secretary Henry Paulson and US Federal Reserve chair Ben Bernanke on down, they argue that the crisis can be explained simply in terms of problems in the financial sector. At the same time, they assert that the underlying real economy is strong, the so-called fundamentals in good shape.

This could not be more misleading. The basic source of today’s crisis is the declining vitality of the advanced economies since 1973 and, especially, since 2000. Economic performance in the US, western Europe and Japan has steadily deteriorated, business cycle by business cycle in terms of every standard macroeconomic indicator — GDP, investment, real wages and so forth. Most telling, the business cycle that just ended, from 2001 through 2007, was by far the weakest of the postwar period, and this despite the greatest government-sponsored economic stimulus in US peacetime history.

How would you explain the long-term weakening of the real economy since 1973, what you call in your work «the long downturn’’?

What mainly accounts for it is a deep, and lasting, decline of the rate of return on capital investment since the end of the 1960s. The failure of the rate of profit to recover is all the more remarkable, in view of the huge drop-off in the growth of real wages over the period. The main cause, though not the only cause, of the decline in the rate of profit has been a persistent tendency to overcapacity in global manufacturing industries.

What happened was that one after another new manufacturing powers entered the world market –Germany and Japan, the northeast Asian newly indistrialising countries (NICs), the South East Asian «Tigers» and, finally, the Chinese leviathan.

These later-developing economies produced the same goods that were already being produced by the earlier developers, only cheaper. The result was too much supply compared to demand in one industry after another, and this forced down prices and in that way profits. The corporations that experienced the squeeze on their profits did not, moreover, meekly leave their industries. They tried to hold their place by falling back on their capacity for innovation, speeding up investment in new technologies.

But of course this only made overcapacity worse. Due to the fall in their rate of return, capitalists were getting smaller surpluses from their investments. They therefore had no choice but to slow down the growth of plant and equipment and employment. At the same time, in order to restore profitability, they held down employees’ compensation, while governments reduced the growth of social expenditures.

But the consequence of all these cutbacks in spending has been a long-term problem of aggregate demand. The persistent weakness of aggregate demand has been the immediate source of the economy’s long term weakness.

The crisis was actually triggered by the bursting of the historic housing bubble, which had been expanding for a full decade. What is your view of its significance?

The housing bubble needs to be understood in relation to the succession of asset price bubbles that the economy has experienced since the middle 1990s, and especially role of the US Federal Reserve in nurturing those bubbles. Since the start of the long downturn, state economic authorities have tried to cope with the problem of insufficient demand by encouraging the increase of borrowing, both public and private. At first, they turned to state budget deficits, and in this way they did avoid really deep recessions. But, as time went on, governments could get ever less growth from the same amount of borrowing.

In effect, in order stave off the sort of profound crises that historically have plagued the capitalist system, they had to accept a slide toward stagnation. During the early 1990s, governments in the US and Europe, led by the US administration of US President Bill Clinton, famously tried to break their addiction to debt by moving together toward balanced budgets. The idea was to let the free market govern the economy. But, because profitability had still not recovered, the reduction in deficits delivered a big shock to demand, and helped bring about the worst recessions and slowest growth of the postwar era between 1991 and 1995.

To get the economy expanding again, US authorities ended up adopting an approach that had been pioneered by Japan during the later 1980s. By keeping interest rates low, the Federal Reserve made it easy to borrow so as to encourage investment in financial assets. As asset prices soared, corporations and households experienced huge increases in their wealth, at least on paper. They were therefore able to borrow on a titanic scale, vastly increase their investment and consumption, and in that way, drive the economy.

So, private deficits replaced public ones. What might be called “asset price Keynesianism” replaced traditional Keynesianism. We have therefore witnessed for the last dozen years or so the extraordinary spectacle of a world economy in which the continuation of capital accumulation has come literally to depend upon historic waves of speculation, carefully nurtured and rationalised by state policy makers and regulators — first the historic stock market bubble of the later 1990s, then the housing and credit market bubbles from the early 2000s.

You were prophetic in forecasting the current crisis as well as the 2001 recession. What is your outlook for the global economy? Will it worsen, or will it recover before the end of 2009? Do you expect that the current crisis will be as severe as the Great Depression?

The current crisis is more serious than the worst previous recession of the postwar period, between 1979 and 1982, and could conceivably come to rival the Great Depression, though there is no way of really knowing.

Economic forecasters have underestimated how had bad it is because they have overestimated the strength of the real economy and failed to take into account the extent of its dependence upon a build up of debt that relied on asset price bubbles. In the US, during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the postwar epoch. There was no increase in private sector employment. The increase in plant and equipment was about a third off the previous the postwar low. Real wages were basically flat. There was no increase in median family income for the first time since WWII. Economic growth was driven entirely by personal consumption and residential investment, made possible by easy credit and rising house prices.

Economic performance was this weak, even despite the enormous stimulus from the housing bubble and the Bush administration’s huge federal deficits. Housing by itself accounted for almost one-third of the growth of GDP and close to half of the increase in employment in the years 2001-2005. It was therefore to be expected that when the housing bubble burst, consumption and residential investment would fall, and the economy would plunge.

Many assert that the current crisis is a typical «Minsky crisis» not a Marxian one, arguing that that the financial speculation bubble bust has played the central role in this crisis. How would you respond?

I don’t think it’s helpful to counterpose in that way the real and financial aspects of the crisis. As I emphasised, it is a Marxian crisis, in that it finds its roots in a long-term fall and failure to recover of the rate of profit, which is the fundamental source of the extended slowdown of capital accumulation right into the present. In 2001, the rate of profit for US non-financial corporations was the lowest of the postwar period, except for 1980.

Corporations therefore had no choice but to hold back on investment and employment, but this made the problem of aggregate demand worse, further darkening the business climate. This is what accounts for the ultra-slow growth during the business cycle that just ended.

Nevertheless, to understand the current collapse, you have to demonstrate the connection between the weakness of the real economy and the financial meltdown. The main link is the economy’s ever-increasing dependence on borrowing to keep it turning over and the governments’ ever greater reliance on asset price run-ups to allow that borrowing to continue.

The basic condition for the housing and credit market bubbles was the perpetuation of low costs of borrowing. The weakness of the world economy, especially after the crises of 1997-1998 and 2001-2002, plus East Asian governments’ huge purchases of dollars to keep their currencies down and US consumption growing, made for unusually low long-term interest rates. At the same time, the US Fed kept short-term interest rates lower than at any time since the 1950s.

Because they could borrow so cheaply, banks were willing to extend loans to speculators, whose investments drove the price of assets of every type ever higher and the return on lending (interest rates on bonds) ever lower.

Symptomatically, housing prices soared and the yield in real terms on US treasury bonds plunged. But because yields fell ever lower, institutions the world over that depended on returns from lending, had an ever more difficult time making sufficient profits. Pensions funds and insurance companies were particularly hard hit, but hedge funds and investment banks were also affected. These institutions were therefore all too ready to make massive investments in securities backed by highly dubious sub-prime mortgages because of the unusually high returns they offered, ignoring their unusually high risk. In fact, they could not get enough of them. Their purchases of mortgage-backed securities allowed mortgage originators to keep lending to ever less-qualified borrowers.

The housing bubble reached historic proportions, and the economic expansion was allowed to continue. But, of course, this could not go on for very long. When housing prices fell, the real economy went into recession and the financial sector experienced a meltdown, because both had depended for their dynamism on the housing bubble. Today, the recession is making the meltdown worse because it is exacerbating the housing crisis. The meltdown is intensifying the recession because it is making access to credit so difficult. It is the mutually reinforcing interaction between the crisis in the real economy and financial sector that has made the downward slide so intractable for policy makers and the potential for catastrophe so evident.

Even if one grants that postwar capitalism entered a period of long downturn in the 1970s, it seems undeniable that the neoliberal capitalist offensive has prevented the worsening of the downswing since the 1980s.

If you mean by neoliberalism the turn to finance and deregulation, I do not see that it helped the economy. But, if you mean by it, the stepped-up assault by employers and governments on workers’ wages, working conditions and the welfare state, there can be little doubt that it prevented the fall in the rate of profit from getting worse. Even so, the employers’ offensive did not wait until the so-called neoliberal era of the 1980s. It began in the wake of the fall of profitability, starting in the early 1970s, along with Keynesianism. It did not, moreover, result in recovery of the rate of profit and only further exacerbated the problem of aggregate demand. The weakening of aggregate demand ultimately impelled economic authorities to turn to more powerful and dangerous forms of economic stimulus, the “asset price Keynesianism” that led to the current disaster.

Some have argued that a new paradigm of «financialisation’’ or «finance-led capitalism’’ has sustained a so-called «Capital Resurgent’’ (Gerard Dumenil) between the 1980s and the present. What do you think of the thesis of «financialisation’’ or «finance-led capitalism’’?

The idea of a finance led-capitalism is a contradiction in terms, because, speaking generally — there are significant exceptions, like consumer lending — sustained financial profit making depends on sustained profit making in the real economy. To respond to the fall in the rate of profit in the real economy, some governments, led by the US, encouraged a turn to finance by deregulating the financial sector. But, because the real economy continued to languish, the main result of deregulation was to intensify competition in the financial sector, which made profit making more difficult and encouraged ever greater speculation and taking of risks.

Leading executives in investment banks and hedge funds were able to make fabulous fortunes, because their salaries depended on short-run profits. They were able to secure temporarily high returns by expanding their firms’ assets/lending and increasing risk. But this way of doing business, sooner or later, came at the expense of the executives own corporations’ long-term financial health, leading, most spectacularly, the fall of Wall Street’s leading investment banks.

Every so-called financial expansion since the 1970s very quickly ended in a disastrous financial crisis and required a massive bail-out by the state. This was true of the Third World lending boom of the 1970s and early 1980s; the savings and loans run-up, the leveraged buyout mania, and the commercial real estate bubble of the 1980s; the stockmarket bubble of the second half of the 1990s; and of course the housing and credit market bubbles of the 2000s. The financial sector appeared dynamic only because governments were prepared to go to any lengths to support it.

Keynesianism or statism seems poised to return as the new Zeitgeist. What is your general assessment of resurgent Keynesianism or statism? Can it help to resolve, or at least, alleviate the current crisis?

Governments today really have no choice but to turn to Keynesianism and the state to try to save the economy. After all, the free market has shown itself totally incapable of preventing or coping with economic catastrophe, let alone securing stability and growth. That’s why the world’s political elites, who only yesterday were celebrating deregulated financial markets, are suddenly now all Keynesians.

But there is reason to doubt that Keynesianism in the sense of huge government deficits and easy credit to pump up demand can have the impact that many expect. After all, during the past seven years, thanks to the borrowing and spending encouraged by the US Federal Reserve’s housing bubble and the Bush administration’s budget deficits, we witnessed what was, in effect, probably the greatest Keynesian economic stimulus in peacetime history. Yet, we got the weakest business cycle in the postwar epoch.

Today, the challenge is much greater. As the housing bubble collapses and credit becomes harder to come by, households are cutting back on consumption and residential investment. As a consequence, corporations are experiencing falling profits. They are therefore cutting back on wages and laying-off workers at a rapid pace, detonating a downward spiral of declining demand and declining profitability. Households had long counted on rising house prices to enable them to borrow more and to do their saving for them. But now, because of the build-up of debt, they will have to reduce borrowing and increase saving at the very time that the economy most needs them to consume.

We can expect that much of the money that the government places in the hands of households will be saved, not spent. Since Keynesianism could barely move the economy during the expansion, what can we expect from it in the worst recession since the 1930s? To have a significant effect on the economy, the Obama administration will likely have to contemplate a huge wave of direct or indirect government investment, in effect a form of state capitalism. To actually accomplish this however would require overcoming enormous political and economic obstacles.

US political culture is enormously hostile to state enterprise. At the same time, the level of expenditure and state indebtedness that would be required could threaten the US dollar. Until now, East Asian governments have been happy to fund US external and government deficits, in order to sustain US consumption and their own exports. But, with the crisis overtaking even China, these governments may lose the capacity to finance US deficits, especially as they grow to unprecedented size. The truly terrifying prospect of a run on the dollar looms in the background.

What is your general assessment of the victory of Barack Obama in the last US presidential election? Do you think Obama is a «lesser evil», compared to the Bush administration? Many regard Obama as a FDR of the 21st century. Indeed, Obama promises a «new New Deal». Do you think the anti-capitalist progressives can give critical support to some of his «new New Deal»?

The triumph of Obama in the election is to be welcomed. A victory for John McCain would have been a victory for the Republican Party and given an enormous boost to the most reactionary forces on the US political scene. It would have been seen as an endorsement of the Bush administration’s hyper-militarism and imperialism, as well as its explicit agenda of eliminating what is left of the trade unions, the welfare state and environmental protection.

That said, Obama is — like Roosevelt — a centrist Democrat, who cannot be expected, on his own, to do much to defend the interests of the vast majority of working people, who will be subjected to an accelerating assault from corporations trying to make up for their collapsing profits by reducing employment, compensation and so forth.

Obama’s backed the titanic bailout of the financial sector, which represents perhaps the greatest robbery of the US taxpayer in history, especially as it came with no strings attached for the banks. He also supported the bail-out of the auto industry, even though it is conditional on massive cuts in the compensation of auto workers. The bottom line is that, like Roosevelt, Obama can be expected to take decisive action in defence of working people only if he is pushed by way of organised direct action from below. The Roosevelt administration passed the main progressive legislation of the New Deal, including the Wagner Act and the Social Security Act, only after it was pressured to do so by a great wave of mass strikes. We can expect the same from Obama.

According Rosa Luxemburg, and recently David Harvey, capitalism overcomes its tendency to crisis by way of geographical expansion. According to Harvey, this is often facilitated by massive state investments in infrastructure, to back up private capital investment, often foreign direct investment. Do you think that capitalism can find an exit from the current crisis, in Harvey’s terminology, by way of a «spatio-temporal-spatial fix’’?

This is a complex issue. I think, first of all, it’s true and critically important to say that geographical expansion has been essential to every great wave of capital accumulation. You might say that growth of the size of the labour force and growth of the system’s geographical space are the sine qua non, the essentials, for capitalist growth.

The postwar boom is a good example, as it featured spectacular expansions of capital into the US south and southwest and into war-torn western Europe and Japan. Investment by US corporations played a critical role, not only in the US but in western Europe in this epoch.

Without question, this expansion of the labour force and the capitalist geographical arena was indispensable for the high profit rates that made the postwar boom so dynamic. From a Marxist standpoint, this was a classical wave of capital accumulation and, necessarily, entailed both the sucking in of huge masses of labour from outside the system, especially from the pre-capitalist countryside in Germany and Japan, and the incorporation or re-incorporation of additional geographical space on an a huge scale.

Nevertheless, I think that by and large the pattern of the long downturn, since the late 1960s and early 1970s, has been different. It is true that capital responded to falling profitability by further expansion outward, seeking to combine advanced techniques with cheap labour. East Asia is of course the fundamental case, and unquestionably represents a world-historical moment, a fundamental transformation, for capitalism. But, though expansion into East Asia represented a response to falling profitability, it has not, I think, constituted a satisfactory solution. This is because, at the end of the day, the new manufacturing production that has emerged so spectacularly in East Asia is to a great extent duplicating the manufacturing production already taking place elsewhere, though taking place more cheaply.

The problem is on a system-wide scale, it’s more exacerbating than resolving the problem of overcapacity. In other words, globalisation has been a response to falling profitability, but because its new industries are not, basically, complementary for the world division of labour, but redundant, you have had a continuation of the problem of profitability.

The bottom line, I think, is that to actually resolve the problem of profitability that has so long plagued the system — slowing capital accumulation and calling forth ever greater levels of borrowing to sustain stability — the system requires the crisis that has so long been postponed.

Because the problem is overcapacity, massively exacerbated by the build-up of debt, what is still required is, as in the classical vision, a shake out from the system of high-cost, low-profit firms, the subsequent cheapening of means of production, and the reduction of the price of labour. It’s by way of crisis that, historically, capitalism has restored the rate of profit and established the necessary conditions for more dynamic capital accumulation. During the postwar period, crisis has been warded off, but the cost has been a failure to revive profitability leading to worsening stagnation. The current crisis is about that shakeout that never happened.

So you think that only the crisis can resolve the crisis? That’s a classical Marxian answer.

I think that that is probably the case. The analogy would be this. At first, in the early 1930s, the New Deal and Keynesianism were ineffective. In fact, through the length of the 1930s, there was a failure to establish the conditions for a new boom, as was demonstrated when the economy fell back into the deep recession of 1937-1938. But, eventually, as a result of the long crisis in the 1930s, you shook out the high cost, low profit means of production, creating the basic conditions for high rates of profit. So, by the end of the 1930s, you could say that the potential rate of profit was high and all that was missing was a shock to demand. That demand was provided of course by the massive spending on armaments for World War II.

So, during the war, you got high rates of profit and those high rates of profit provided the necessary condition for the postwar boom. But I don’t think that Keynesian deficits could have worked even if they had been tried in 1933, because you needed, in Marxian terms, a system-cleansing crisis first.

Do you think that the current crisis will lead to a challenge to US hegemony? World-system theorists, like Immanuel Wallerstein … are arguing that the hegemony of US imperialism is declining.

This is again a very complex question. Perhaps I am mistaken, but I think that many of those who believe that there has been a decline in US hegemony basically view US hegemony as mainly an expression of US geopolitical power and, in the end, US force. From this standpoint, it’s mainly US dominance that makes for US leadership, it’s US power over and against other countries that keeps the US on top. I don’t see US hegemony that way. I see the elites of the world, especially the elites of the capitalist core broadly conceived, as being very happy with US hegemony because what it means for them is that the US assumes the role and the cost of world policemen. This is true, I think, of the elites even of most poor countries today. What is the goal of the US world policeman? It’s not to attack other countries. Mainly, it’s to keep social order on a world scale, to create stable conditions for global capital accumulation. It’s main purpose is to wipe out any popular challenges to capitalism, to support the existing structures of class relations.

For most of the postwar period, there were nationalist-statist challenges, especially from below, to the free rein of capital. They unquestionably were met by the most brutal US force, the most naked expressions of US domination. Although within the core there was US hegemony, outside of it there was dominance. But, with the fall of the Soviet Union, and China and Vietnam taking the capitalist road, and the defeat of national liberation movements in places like southern Africa and Central America, resistance to capital in the developing world was very much weakened, at least for the time being.

So, today, the governments and elites not only of western and eastern Europe, Japan and South Korea, but also Brazil, India and China — most any place you can name — would prefer the continuation of US hegemony. US hegemony will fall not because of the rise of a another power capable of contending for world domination.

Above all, China prefers US hegemony. The US is not planning to attack China and, until now, the US has kept its market wide open to Chinese exports. With the US providing the role of world policeman and insuring ever freer trade and capital movements, China has been allowed to compete in terms of cost of production, on an equal playing field, and this has been incredibly beneficial to China — it couldn’t be better.

Can the US continue its hegemony in the current crisis? This is a much harder question. But I think that, in the first instance, the answer is yes. The world’s elites want more than anything to sustain the current globalising order, and the US is key to that. None of the world’s elites are trying to exploit the crisis and the United States’ enormous economic problems, to challenge US hegemony.

China keeps saying, “We’re not going to continue to pay for the US to continue its profligate ways», referring to the manner China covered record-breaking US current account deficits during the past decade and to the titanic US budget deficits now being created. But, do you think China has now cut the US off? Not at all. China is still pouring as much money as it can into the US to try to keep the US economy going, so that China can keep developing the way it did.

But, of course what is desired is not always possible. The depth of the Chinese crisis may be so great that it can no longer afford to finance US deficits. Or, the assumption of ever greater US deficits and printing of money by the Federal Reserve could lead to the collapse of the dollar, detonating true catastrophe. In either case, all bets are off. If those things happened, there would have to be a construction of a new order. But, under conditions of deep crisis that would be extremely difficult. Indeed, under such conditions, the US, as well as other states, could easily turn to protection, nationalism, and even war.

I think, as of this moment, the elites of the world still are trying to avoid this — they are not ready for it. What they want to is to keep markets open, keep trade open. This is because they understand that the last time states resorted to protectionism to solve the problem was at the time of the Great Depression, and this made the depression way worse, because in effect, when some states started to protect, everybody moved to protection, and the world market closed down. Next, of course, came militarism and war.

The closing of world markets would obviously be disastrous today, so elites and governments are doing their very best to prevent a protectionist, statist, nationalist, militarist outcome. But politics is not just an expression of what the elites want, and what elites want changes over time. Elites are, moreover, generally divided and politics has autonomy. So, for example, it can hardly be ruled out that, if the crisis gets very bad — which would not at this point be a big surprise — you would see a return of far-right politics, a politics of protectionism, militarism, anti-immigration, nationalism. This sort of politics not only could have broad popular appeal. Growing sections of business might find it the only way out, as they see their markets collapse, the system in depression, see a need for protection from competition and state subsidies of demand by way of military spending.

This was, of course, the response that prevailed in much of Europe and Japan during the crisis of the interwar period. Today, the right wing is on its heels, because of the failures of the Bush administration and because of the crisis. But, if the Obama administration is unable to counter the economic collapse, the right could easily come back, especially because the Democrats are really offering no ideological alternative.

You spoke about a potential crisis in China. What do you think of the current state of Chinese economy?

I think the Chinese crisis is going to be a lot worse than people expect, and this is for two main reasons. The first is that the US crisis, and the global crisis more generally, is much more serious than people expected, and in the last analysis, the fate of the Chinese economy is inextricably dependent on the fate of the US economy, the global economy.

This is not only because China has depended to such a great extent on exports to the US market. It is also because most of the rest of the world is also so dependent on the US, and that especially includes Europe. If I’m not mistaken, Europe recently became China’s biggest export market. But, as the crisis originating in the US brings down Europe, Europe’s market for Chinese goods will also contract. So, the situation for China is much worse than what people expect, because the economic crisis is much worse than people expected.

Second, in people’s enthusiasm for what has been China’s truly a spectacular economic growth, they have ignored the role of bubbles in driving the China’s economy. China has grown, basically by way of exports, and particularly a growing trade surplus with the US. Because of this surplus, the Chinese government has had to take political steps to keep the Chinese currency down and Chinese manufacturing competitive. Specifically, it has bought up US dollar-denominated assets on a titanic scale by printing titanic amounts of the renminbi, the Chinese currency. But the result has been to inject huge amounts of money into the Chinese economy, making for ever easier credit over a long period.

On the one hand, enterprises and local governments have used this easy credit to finance massive investment. But, this has made for ever greater overcapacity. On the other hand, they have used the easy credit to buy land, houses, shares and other sorts of financial assets. But this has made for massive asset price bubbles, which have played a part, as in the US, in allowing for more borrowing and spending. As the Chinese bubbles burst, the depth of the overcapacity will be made clear. As the Chinese bubbles burst, you will also have, as across much of the rest of the world, a huge hit to consumer demand and disruptive financial crisis.

So, the bottom line is, the Chinese crisis is very serious, and could make the global crisis much more severe.

So you think the capitalist logic of overproduction is also applied to China?

Yes, just like in South Korea and much of East Asia in later the 1990s. It’s not that dissimilar. The only thing that hasn’t happened yet is the kind of revaluation of the currency that really killed the South Korean manufacturing expansion. The Chinese government is doing everything to avoid that.

Then you do not agree with the characterisation of Chinese society as a kind of «non-capitalist market economy»?

Not at all.

So you think China is currently capitalist?

I think it’s fully capitalist. You might say that China had a market non-capitalist economy maybe through the 1980s, when it had very impressive growth by means of the town and village enterprises. The town and village enterprises were publicly owned, owned by local governments, but operated on a market basis. That economic form, you might say, initiated the transition to capitalism. So perhaps up to maybe the early 1990s, it was still a kind of non-capitalist market society, especially because there was still such a big industrial sector owned and planned by the central state. But, from that point on, there was a transition to capitalism, which has certainly by now been completed.

What do you think of the severity of the coming South Korean economic crisis? Do you think it could be more severe than the IMF crisis of 1997-1998? In order to cope with the coming crisis, the Lee Myung-bak government is now reviving Park Chung-Hee style state-led investment for the construction of huge social infrastructure, especially Korean peninsula’s «Great Canal’’, while copying Obama’s green-growth policies. However, Lee Myung-bak’s government still tries to stick to the neoliberal deregulation policies of the post-1997 crisis period, especially by turning to the US-Korea Free Trade Agreement. You might call this a hybrid approach, combining what seems to be an anachronist return to a Park Chung-Hee style state-led method of development with contemporary neoliberalism. Will it be effective in combating or alleviating the coming crisis?

I’m doubtful that it will be effective. This is not necessarily because it represents a throwback to Park’s state-led organised capitalism or because it embraces neoliberalism. It is because, whatever its internal form, it continues to depend on globalisation at a time when the global crisis is bringing about an extraordinary contraction of the world market.

We were just talking about China, and I was arguing that China is likely to be in serious trouble. But, China has low wages, potentially a huge domestic market, so over time it could conceivably have a better shot than South Korea of confronting the crisis, though I’m far from sure about this.

South Korea, I think, will be hard hit. It was hard hit in 1997-1998, but was saved by the US stockmarket bubble and the resulting growth of US borrowing, spending and imports. But, when the US stockmarket bubble burst in 2000-2002, South Korea went into what promised to be an ever more serious crisis than 1997-1998. Nevertheless, the US housing bubble came to the rescue of South Korea during the recent period. But, now the US bubble, the second US bubble, has collapsed, and there’s no third bubble to get South Korea out of the current crisis. It’s not necessarily because South Korea is doing the wrong thing. It’s because I don’t think there’s going to be an easy way out for any part of what has become a truly global, interdependent capitalist system.

So what you are saying is that external environment is far worse than ever before?

That’s the main point.

What then are the urgent tasks of progressives in South Korea? South Korean progressives are very critical of Lee Myung-bak. They usually support the growth of the welfare state and redistribution of income as an alternative to Lee’s project of investing in Canal construction, of big social overhead capital. This is the hot issue in South Korean society today. South Korean progressives point out that although Lee Myung-bak talks about green growth, his construction project would destroy whole environments. Do you agree with them?

Of course, we should oppose such ecologically disastrous projects.

Do you think that building a Swedish-type welfare state would be the reasonable strategy for South Korean progressives in the midst of the economic crisis?

I think the most important thing South Korean progressives could do would be to restrengthen the organisations of Korean labour. Only by rebuilding the South Korean working-class movement could the left build the power that it needs to win whatever demands it is advocating. The only way that working people can really develop their power is through building new organisations in the course of struggle and, it’s only in the course of struggle, that they are likely to come to a progressive politics, or indeed decide what a progressive politics actually should be at this moment.

I think the best way to forge a left political response today is to help the people most affected to gain the organisation and power to decide what’s collectively in their interests. So, rather than try to figure out now, from above in a technocratic way, what’s the best answer, the key for the left is to catalyse the reconstitution of the power of working people.

The South Korean labour movement has obviously been weakened a great deal since the crisis of 1997-1998. At a minimum, the priority for progressives is to do what they can to improve the environment for labour organising, for restrengthening the trade unions right now.

That goes for everywhere around the world. That’s the key objective. Without the revival of working-class power, the left will quickly find that most issues of government policy are truly academic. I mean if the left is to affect state policy, there must be a change, a big change, in the balance of class power.

Do you expect that there will be an opening for progressives in a world with recent failures of neoliberalism?

The defeat of neoliberalism is definitely creating major opportunities that the left did not have before. Neoliberalism never much appealed to large parts of the population. Working people never identified with free markets, free finance and all that. But I think that large sections of the population were convinced that this was the only alternative, they were convinced of TINA [there is no alternative]. But, now the crisis has revealed the total bankruptcy of the neoliberal mode of economic organisation, and you can already see the change.

It has been very powerfully manifested in the opposition by US working people to the bail-outs for the banks and financial sector. What they are saying today is that, “We are told that saving the financial institutions, the financial markets, is the key to restoring the economy, prosperity. But we don’t believe it. We don’t want any more of money going to these people who are just robbing us.” So there is a big vacuum ideologically. Thus there is a big opening for left ideas.

The problem is that there is very little organisation of working people, let alone any political expression. So one can say there is this very big opportunity created by the change in the political environment, or the ideological climate, but that by itself is not going to provide a progressive outcome. So, again, the top priority for progressives — for any left activists — where they should be active is in trying to revive the organisations of working people.

Without the re-creation of working class power, few progressive gains will be possible, and the only way to recreate that power is by way of mobilisation for direct action. Only through working people taking action, collectively and en masse, will they be able to create the organisation and amass the power necessary to provide the social basis, so to speak, for a transformation of their own consciousness, for political radicalisation.

Η «κοινωνικοποίηση» του ελληνικού χρέους

Germany drawing up plans for Greece to leave the euro

Plans for Greece to default, potentially leaving the euro, have been drafted in Germany as the European Union begins to face up to the fact that Greek debt is spiralling out of control – with or without a second bailout.

The German finance ministry is actively pushing for Greece to declare itself bankrupt and to agree a «haircut» on the bulk of its debts held by banks, a move that would be classed as a default by financial markets.

Eurozone finance ministers meet on Monday to approve the next tranche of loans from the EU and the International Monetary Fund, designed to stave off national bankruptcy while the new Greek government puts the country’s finances in order.

But the severe austerity measures being demanded have caused such fury in Greece, and the cuts required are so deep, that Wolfgang Schäuble, the German finance minister, does not believe that any government would be able to implement them.

His pessimism has been tipped into despair with a secret European Commission, Central and IMF report that even if Greece made good on its promises, it would not be enough to reach the target of bringing total debt to 120 per cent of GDP by 2020.

«He just thinks the Greeks cannot do what needs to be done. And even if by some miracle they did what has been promised, he – and a growing group – are convinced it will not pull Greece out the hole,» said a eurozone official.

«The idea instead is that the Greek government should officially declare itself bankrupt and begin negotiating an even bigger cut with its creditors. For Schäuble, it is more a question of when, not if.»

The German finance minister’s comments are certain to plunge the authorities in Athens into even deeper gloom. On Saturday they tried to sound optimistic, with a cabinet meeting to thrash out the final details of an austerity package.

The cuts, including a reduction in the minimum wage, mass redundancies within the public sector, and a slashing of the health and defence budgets, sparked rage on the streets of Athens last week, with buildings set on fire amid angry protests.

But the country’s politicians are resolutely trying to sound upbeat. «The Greek people have done everything they can and we are determined to make good on our commitments,» said Christos Papoutsis, public order minister.

The French prime minister, Francois Fillon, lent his support to the embattled Greeks when he cautioned last week that Europe should not «play with the default of Greece» and must now play its part.

«The Greeks have promised very important reforms,» he told RTL radio. «The Europeans now have to keep their commitments.»

With Greek morale at rock bottom, the national mood darkened yet further after armed thieves looted a museum on Friday in Olympia, birthplace of the Olympic Games, and stole bronze and pottery artefacts – just weeks after the country’s National Gallery was burgled.

One Greek newspaper suggested the state could no longer properly look after the nation’s immense cultural heritage. «The Greek state has gone bankrupt, let’s face it,» the conservative daily Kathimerini said in an editorial.

«If the state cannot guard the country’s great cultural heritage for financial or other reasons it must find other ways to do it.»

Mr Schäuble’s pessimism will not be welcomed in Athens. The hugely influential German politician’s doubts have been growing for several weeks, and prompted angry exchanges when Greece accused Germany of trying to drive it out of the euro.

His scepticism is not yet fully shared by Angela Merkel, who is said still to be determined to prevent Greece’s financial collapse. «She thinks Greece going bust could cause a shock wave that buries other countries – with Spain and Italy among them. It could break apart the entire monetary union,» said an official.

But it has support from Austria and Finland – holding the prospect that a eurozone meeting tomorrow will fail to agree the next set of EU-IMF payments for Greece.

Greece must service €14.5 billion of debt on March 20 and, before EU-IMF cash can flow into its accounts, persuade private creditors of the country, mainly banks, insurance companies and funds, to give up on 70 per cent of their claims.

«The private sector involvement takes at least four weeks to issue the prospectus and to get subscribers, and without a deal on Monday then time will run out in March,» said an EU diplomat.

Rumours are already circulating in Wall Street that banks are preparing for a «credit event» – a technical term used by credit agencies to mean a default – in the days immediately following March 20, as Greece looks likely to be unable to meet its debts.

The sense that an endgame is approaching has been fuelled by the secret «troika» report, by EU, IMF and ECB officials on Greek debt «sustainability».

It found that even if Greece implemented all the austerity measures expected of it, and if it achieves highly optimistic economic growth targets, it will still fall short of what is needed, with debt likely to total 129 per cent of GDP in 2020.

But the European Central Bank and the Eucopean Commission are, for now, lining up with Mrs Merkel to push for the rescue attempt to continue, fearful that the financial tsunami that would be unleashed if it failed would swamp the eurozone.

Mr Schäuble maintains that since Greece is already regarded by the financial world as bankrupt, a formal bankruptcy would have no negative consequences for other euro members.

*Stavros Mavroudeas (http://econlab.uom.gr/~smavro/ ) és Professor de Política Econòmica al Departament d’Econòmiques de la universitat de Macedònia. Ha publict entre altres «Convergence or Divergence: the Case of Greece»; ‘Forms of Existence of Abstract Labour and Value-form»; «Regulation Theory: The Road from Creative Marxism to Post-Modern Disintegration»; «Periodising Capitalism: Problems and Method – The Case of the Regulation Approach»; «Overworked Greeks? Working Time Trends in Greece»; «A History of Contemporary Political Economy and Post-Modernism»; i «Grossmann, Kalecki and the Theory of Crisis: A Comment on Trigg»; «Henryk Grossmann’s Falling Rate of Profit Theory of Crisis: A Presentation and a Reply to Old and New Critics». Traducció catalana deLa Fàbrica .